A TPDEARR Article
Trans-Pacific Dynamic Equity Allocation Research Report
Oh! How we long for that most elusive of market qualities, that teases us so briefly, then vanishes in the breeze of the unexpected.
Oh! How our budgets long for unchanging, unwrinkled monotony, and the sameness and certitude of perfect predictability.
Oh! How our planners and advisers convince and cajole our sympathies into resting even more assuredly in what can never be assured.
Stability: the thing every forward-thinker wants (and is willing to go to any lengths to construct narratives for), which we believe combats uncertainty—the instability we’ve reinforced ourselves to fear1.
In this quarter’s Geopolitical Shifts TPDEARR article we rotate the observation of stability as it relates to international relations in order to study the ideological object from different angles, particularly as such observations relate to unfurling market opportunities around the trans-Pacific economies.
Up (minus) Down ≠ Stable
Let’s start with some thought experiments: You decide to measure the location and speed of a bean bag resting on the street every 60 seconds. You note the information to begin. A kid rides by on a bike, picks up the bean bag and throws it 100 feet up into the air before it falls back to the ground. Sixty seconds pass, you then measure the location and speed again. No change, obviously. Two identical data points tell a story of perfect location stability. You repeat a dozen more times; all the same. Is it a stable system? Does a “stable” data trail helpfully indicate the nature of events within this system?
Let’s try a different one:
You stick a pencil into the sand and try to balance a balloon on top. A simple breeze makes the task impossible. So, you stick another pencil in behind the first one to prop up the balloon. Then another, just for good measure. The wind picks up and changes direction; the balloon falls. You then place a whole collection of sticks and posts and string and tape together to make a cocoon of stabilizers around the balloon to counteract the windy forces and hold it still. The balloon is barely even visible anymore, and it’s certainly not staying upright on the pencil tip on its own, but, for the moment, it isn’t being blown around wildly. There, you did it: stable.
Well… is the balloon itself stable, or does it just appear stable? Does the distinction matter? It’s certainly a different thing to state “the balloon is stable” versus “the system that holds the balloon has a stabilizing influence on the balloon.” And further, there’s no measurement of the robustness of the stability—how resistant it is to extreme, abnormal or unexpected external pressures. A strong enough gust could pick-up and relocate the whole contraption to another neighborhood!
…So… is it stable?
It’s nonsense to bicker over a “correct” answer to this question as the thought experiment serves rather to express how simple, un-nuanced language describing some state of “stability” is basically just agenda-directed wordplay, especially considering geopolitical systems are much more complex than balloon-balancing tasks. No system is uninfluenced by outside factors; no system is impervious to destabilization beyond a measure of resistance. Permanent stability, in and of itself, is a pipedream, invariably revealed to be so by increasing the granularity of measurement units, whatever they are. The more precisely one seeks to record any measurement, the more volatile (aka unstable) the measurements reveal themselves to be, all the way down to quantum uncertainty on the one hand and the ultimate death of the universe and the obsolescence of time on the other. So the perception of stability can only be maintained by controlling the focus and scale of measurement and denying further investigation, or in other words: stability is a tale spun through optics and narrative control.
Stability is a matter of perspective. Even in business—capitalism, the singularized pursuit for financial growth—the idea of stability means something different to each observing party. Consider how revenue stability in the global narrative of war times (aka, instability) might be perceived differently for arms manufacturers than retail diaper makers. From the same set of events, two very different outcomes. US-PRC rivalry heats up over a few years (so, perceived regional instability… right?); so, Japan’s Prime Minister Kishida announces increases to defense spending in late 2022, then Japanese defense contractor Mitsubishi Heavy Industries (a TPDEARR Squad pick) sees its stock price triple2 in 18 months while diaper companies continue to struggle in a low-fertility Japanese population. Meanwhile, retailers across the US, against the same backdrop of regional instability (right?), are folding like cards. Dozens have collapsed in the same time period, no doubt already pre-crippled by COVID-induced spending volatility (which is perhaps a catalyst, some would argue, for further fearing instability.) Bankruptees include everything from David’s Bridal to Toys R Us to Bad Bath & Beyond to Rite Aid, all losing the battle to soak up enough consumer revenue in a steadily inflating economy. And inflation (itself not stable) is also not a trivial addition to the stability equation, so perhaps it’s a good time to revisit what exactly stability is.
“I” Am the Beholder
At every scale, from nation to city to neighborhood to household to individual, “stability” has different determinants and individuated subjectivity, so although people might believe that they agree on the definition of the dictionary term, it would be folly to think that any two people hold exactly the same idea intellectually of how “stability” plays out in all its interconnections. Human perceptions are also shaped by internal (and quite ineffable) unconscious mentalities as much (or more!) than they are overt details and linguistic explanations, so even mutually-agreed-upon arrangements, such as trade agreements between nation-states, carry within them latent and unexpressed expectations about outcomes. Different people regularly disagree on the level of perceived stability in a given system, despite broad recognition of the same information being accessible to all. Stability is perceiver-dependent.
Further complicating the picture are “optics”—the appearance and social tone associated with viewed behaviors by the public—which are intensely important in geopolitics, and navigating international agreements routinely involves the condensing and rephrasing of (overt) objectives to the public in order to accomplish (covert) ulterior goals politically and geopolitically. This innate discrepancy between overt and covert, regardless of whether or not it is fundamentally intrinsic to leadership, and especially as it applies to stability expectations, points to the reality that in any given moment, international relations between economies consist of overlapping layers of influence and exchange perceived only partially by the other party. Each of these layers is defined by environmental factors and localized idiosyncrasies unique to each participant and impossible to replicate (or fully comprehend) elsewhere.
In contemporary geopolitics, as the “stability” debate primarily revolves around trying to determine the future quality of relationships among economically intertwined nation-states, cultural and “soft power” variables are largely subordinate to the capital and commercial flows that interconnect economies. Security and defense considerations guide commercial relationships to some extent, but even that isn’t a clear-cut assessment. For example, as the US-PRC rivalry continues to flare divisively in media politics, capitalists and industrialists are busy increasing the interconnectivity between and among regional players. Chinese foreign direct investment (FDI) into Mexico has bloomed over the ensuing US-PRC tiff, for example, and Chinese companies and products are diversifying their access to the North American markets. Does less geopolitical camaraderie and more commercial interconnectivity balance out to stability? (The question, like before, is absurd, but media pundits drudge through the absurdity nonetheless.)
And China isn’t the only one seeking to further “nearshore” their efforts closer to the North American purchaser market; Japan and South Korea are also among the top 10 FDI sources flowing into Mexico in 2023, and the increases to industrialization are helping Mexico’s total export market become steadily more prominent. Labor in the Mexican market costs about half what it currently costs in China, and with labor the most expensive part of many industrial operations, expanding a core business footprint in Mexico undoubtedly appears like a “no-brainer” to quite a few corporate financial departments. In the cauldron of overall Mexican economic expansion, the logistics sector in particular appears very fragmented, so competitive pressures are strong. While some may see this competition as extra pressure tamping down profit margins (and yes, that is also frequently the case), it also serves as a challenging and healthy commercial environment that almost always produces innovative, nimble and capable firms who are capable of satisfying customer demands in any market sector; a competitive free market is economically healthy. The “ground floor”, in many cases, is simply the (fragmented, like it is now) time period prior to the accession of a most-dominant player or tier of players; the time to already be in possession of equity before the market value of the business sector balloons and champions are crowned, is now.
Mexican logistics firms are scrambling to accommodate the continuing industrial expansions ensuing from FDI increases, which continue to grow. Mexico was recognized as the 4th most desirable nearshoring (= out of China/de-Sinicizing) destination by global analysts, but as it sits behind Japan, Canada and the US, it is the only sub-advanced economy on the list and greatly skews (in its favor!) the cost-benefit proposals for it compared to its contenders. Imports into the US from Mexico are growing, quite steadily3, and infrastructure expansions support this trend substantially. Outgoing Mexican President Lopez Obrador (AMLO) has laid significant groundwork for major infrastructural upgrades across the country. These include projects to expand ports, airports and railways to alleviate congestion and increase supply chain throughput, but also, perhaps most notably, the Interoceanic Corridor, an integrated intermodal system that interleaves multiple different transportation systems in a country-spanning “bridge” allowing Pacific-sent imports to reach the US East coast while bypassing Panama Canal congestion—this effort primarily serves as a US-China economic linkage which Mexican logistics firms will manage and administer. We strongly endorse [SEP.24 Squad Asset #2] for its highly beneficial positioning in this rapidly expanding Mexican logistical market.
Do these nearshoring efforts draw motivation from US-PRC geopolitical rivalry? Of course.
Do these nearshoring efforts in Mexico, powered by Mexican firms and complimented by Mexican government policies, advantage both the US and the PRC? Yes, of course.
Do these nearshoring efforts have the effect of further entrenching international economic interconnectivity? Yes, of course.
Can something unanticipated happen that might derail these trade enhancements and negate any potential economic benefits? Yes, of course.
So, how might we understand stability in this situation? When we follow the trail of capitalism, instability in geopolitical relations between two other places (US, PRC) has had the effect of increasing infrastructure implementation in a third place (MX), which has a stabilizing impact on the third place, and also, in this case, improves connections between the first two places, and represents a stabilization of the facilitation of future economic ties between them. Stability and instability embody two sides of the same coin; each begets further opportunity for the other, neither is eradicable.
As investors, we recognize this dichotomy is always at play, despite however ignorant we may be of more-intricate local dynamics at any given moment; it is not that the coin has two sides (instability-stability interplay) that we care about, but rather following the trail of the coin itself. Geopolitical discourse (fluxing instability) is not a problem to be solved, but a map for reading the jet-streams of influence that redirect capital flows, frequently to and through stability-reinforcing channels. Companies and governments concerned about geopolitical rivalries will always attempt to allocate capital in ways designed to reassure the instability-wary class of stakeholders that are holding their feet to the fire, whether those people are political constituencies, creditors or equity shareholders. In order to accomplish this reassurance, an entity must narratively assume a position of perspective—an “I” that will behold—and it must connect the impact of corresponding events to the effects they will have on that sense of “I”. For firms, profit preservation dominates the action framework (“I must make money”); for governments, nationalism (“We must put our country first”) is an easy platform on which to garner support in international matters, but the calculus of decision making is much more complex.
First comes Number One
“Ya, but how does this effect me?”
The concern that usually most-dominates the minds of citizenries the world over is economic power: how empowered each individual feels to solve their problems economically. In rich countries like the US, broadly inflating consumer prices are the primary cry of concern, and mainland Americans are largely oblivious of the economic dynamics by which, say, systemic collapse in a smaller economy, might bring about economic aggravation at home. Smaller countries, though, especially around the Asia-Pacific, are quite aware of the ways in which their economic livelihood may be beholden to larger neighbor economies. They know they don’t have a currency that the rest of the world covets. They know they don’t have the scale and variety of commercial interests to leverage their market and negotiating moves. They are trapped, in many cases, by commodity market dynamics they can’t control, such as with fuel or rice, and are subjected to extreme price volatility, often connected to interest rate spreads and other macroeconomic fundamentals that are incorporated into the global economy and dominated by larger players’ financial regimes, primarily the $USD.
Financially “outgunned” by larger nations, smaller nations, always on the lookout to advantage “number one”, must capitalize on opportunity when it presents itself. For a contemporary example, consider how states may try to “neutrally” host engagement with Putin if the direct economic benefits appear to trump direct, indirect and implied concerns from US/West counterparties about enabling a war criminal. A nation-state’s thinking frequently plays out along the following lines:
“Yes, we disagree with the [Ukraine incursion], but we are facing our own challenges and are striving to excel and thrive in our own right. We can benefit from cooperation with [Putin/Russia] in certain areas. He/they are willing to engage with us on financial terms we can afford, and that we believe give us security and economic benefits in the current geopolitical context, and we understand that there are risks involved. Are you [the US/West] saying we are not allowed to pursue our own national best interests?”
If the Malaysian PM Ibrahim Anwar (cozying up to Putin) makes an economic agreement with Russia that raises the standard of living for millions of Malaysians, ought he instead turn down the offer and deprive his people of participating in life modernization, losing ground to regional competitors, angering his constituencies, all on the principle that Russia’s other actions are undesirable? Rich folks from rich countries, who suffer no consequences either way, usually holler “Yes, duh!”, but again: ’tis a question with no un-angering answers.
Non-easy-answers proliferate international geopolitics. In every country on Earth, the current US-PRC rivalry features, and domestic issues must “fit into” broader geopolitical arrangements with the two primary economic poles, each of which shares significant market-based financial relationships with every nation on the planet. Nowhere does the current headline competition between two mighty “foreign” superpowers feature more significantly than in the trans-Pacific sphere, especially throughout Southeast Asia.
China and ASEAN have been each other’s largest trading partners for years now (which is basically the strongest inter-state connection in the modern world) but the picture is significantly complicated by trade and security/defense service agreements with the US/West, along with governmental assistance and innumerable other economic and cultural flows. Chinese aggression in the South China Sea, with overlapping maritime space also claimed by the PRC, Vietnam and the Philippines, has strained relations with neighbors, particularly over the past few months. And deep, historical relationships color each ASEAN nations’ inter-workings with each of the major superpowers that they must negotiate with. Taking the Philippines as an example may help make quicker sense of the complexity:
The Philippines, which (most Americans don’t even know) used to be a former US colony for a few years at the turn of the 20th century, hosts numerous US military installations… but lives and trades in China’s backyard… but shares significant immigration, family and cultural ties with the US (particularly in Hawaii)… but must balance appeasing PRC economic flows which can be either a boon or a devastation for domestic PH industries… but has a political system whose favor vacillates between preference for either superpower… which is currently swinging towards the US… but is also facing internal division after the VP (former China-friendly President Duterte’s daughter) abruptly resigned amid current President Marcos’ policy preferences towards the US… Is this an easy balancing act? Preferentialism towards either side risks angering and threatening the other giant… China is notoriously reactionary, especially when it feels slighted… the US is notoriously overbearing and no less meddlesome than the PRC… the US-China factor is intrinsic to Philippine domestic politics…
The connections don’t stop there: the Philippines needs assistance countering coercion from the (world’s-largest) People’s Liberation Army Navy in the South China Sea (arguably the global economy’s most significant shipping lane) and doesn’t have the decades of spare time plus USD$100s of billions to make it happen alone, so defense agreements are being reinforced to utilize military assistance with treaty partners like the US, but also forged anew with other regional players like Japan, an advanced East Asian nation which also has a scarred history of invading and occupying the Philippines, along with forced labor and brutal “comfort women” policies, the very likes of which continue to maintain an intransigent divide preventing warmer relations between Japan and Korea, where similar traumas perpetrated across the Korean peninsula in Japan’s imperial past are regularly resurfaced in political and social discourse. How are “mini-lateral” arrangements supposed to play out with regional counterparties who each have their own, individualized relationships with each side of the PRC-US tiff? Can the Philippines count on Vietnam to stand firm when negotiating situations in the PH-VT-CN trilateral? PH President Marcos, the leader of an island nation, calls maritime cooperation “the foundation” of bilateral ties between the two countries, so maintaining prominence in this particular space is of no small consequence. How are these interests positioned against the maritime and economic strategies of the economically-larger other ASEAN island nation of Indonesia, the world’s largest archipelago? Indonesia is the world’s largest Muslim-majority country, quite unlike the ~80% Catholic populous of the Philippines, and has no defense treaty obligations to the US4. Neutrality gives Indonesia positioning unlike that available to the Philippines, for better and for worse, but nonetheless different. In many ways, Indonesia can outcompete Filipino efforts on the international stage. And we’re not done yet folks!…
As the world tries to de-Sinicize and strengthen supply chains to become less reliant on China, manufacturing operations and capital are flowing out to, you guessed it, ASEAN nations’ economies like the Philippines, for their cheaper labor and close proximity to major Asian economies and supply chains. China, Asia and the West are all dumping funds into ASEAN countries, which are all competing to offer the most attractive terms, attract the most investment and interest, and use the surge of de-Sinicization to leverage national growth before their regional competitors outdo them in the same endeavor5. If the Philippines can provide the most attractive investment environment (for foreign capital), more capital and business enters the economy providing jobs and quality of life increases…but also more interconnections with other economies which may outclass and outgun the Philippines in terms of stage of development, skewing the power dynamics to favor counterparties. Preferential policies for foreign companies frequently harm domestic market players, so fundamental domestic economic growth (and nationalism!) must be balanced and tempered against international trade agreements and foreign economic policy, both of which must be negotiated expertly and both of which are required for the Philippines to ascend to higher levels of economic development.
These basic international complexities constitute a few surface-level examples of indescribably complicated histories around the Asia Pacific. Geopolitical calculus is messy. Where is stability in this maelstrom? The (market) winners are those who can capitalize on the geopolitical interconnections of the globalized supply chain without overtly threatening the future stability of mutual economic benefit: the expectation of future stability trumps the day now; the future will be dealt with later, as it were.
Final Thoughts
So, what have we learned about the nature of stability? We humans conceive of stability as if it were some achievable ideal, when in reality it is a misnomer, a simpletism, a combination of subjective ideals that fails to encapsulate grander hierarchies of nested comprehension. It is a linguistic tool used by politicians, pundits and heads-of-state to nudge and cajole the hearts and minds of voters and constituencies to their causes. It is a lullaby that lulls us into a false sense of understanding of phenomena, resembling more the notion of a fully-idealized “heaven” than it does any human-constructed element of modern reality. As a goal, it is misguided; it is a temporary, moving target, impossible to maintain or achieve6. Perhaps we’d all be better off directing our attention towards dealing with something constant like change, disorder, or uncertainty—paradoxicality be damned!
Instability is ineradicable; the perception of stability is a false representation. The global economic balancing act is always unstable. In this, the clever investor has always found a way to thrive. Good luck, everyone!
- But why do we insist upon fearing instability? After all, it’s just as likely that turns of events might unfold in our favor!
↩︎ - Stock-tripling growth is not typical for all firms, sustainable, or stable, so, what, it’s undesirable…?
↩︎ - How much of the leveling out of China-sourced US imports the relocation of trade from Chinese companies that’s now newly-incorporated into Mexico-sourced US imports? Informational opacities muddle this determination, but suffice it to say it is greater than 0%.
↩︎ - The point should be stressed here that the South China Sea tumult of late is a considerable “flash point” in geopolitics; rights to fish and patrol maritime territory is a matter of national sovereignty, and no leader can backstep on these issues and expect to be supported by their constituencies. Moreover, as soon as a single shot is fired, the US is treaty-obligated to get involved, a result China is clearly trying to avoid, hence the (quite literal) saber-rattling.
↩︎ - Manufacturing expansion is a zero-sum game: a factory put in one location is a factory not-put somewhere else.
↩︎ - In this way, it is similar to a “normal” bell curve distribution, the datasets of which middling thinkers presuppose to be unaffected by outliers or abnormalities, and, despite being impossible to replicate in actual reality, are nonetheless considered by the powers-that-be to be worthwhile representations of future events, which is of course preposterous.
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tkscm, limited 